A=6 B=3 C=9

After conducting some market research that cost $15,000, Ace Ltd is considering the purchase of a new machine for their card printing business. The machine will cost $4A0,000 and Ace will need to spend another $1B,000 to install the machine. The machine will be installed in a building the company owns. This building is currently being rented out at $3C,000 a year with the next payment due at the end of the year.

The new machine will increase the companys revenue for the next four years by $200,000, $25A,000, 27B,000 and $300,000 per year respectively but the variable costs will also increase by $3C,000 per year and fixed costs will increase by $10,000 per year. The machine will be depreciated on a straight-line basis to zero salvage value over the 4 year life of the project. Ace believes it can sell the machine at the end of 4 years for $20,000. The company has a 10% cost of capital and a 30% tax rate.

As the financial manager of the company, you are conducting a capital budgeting analysis of this project.

a) Calculate the incremental cash flows of the new project for each year. (10 marks)

b) Calculate the discounted payback period of the project assuming end of year cash flows. (4 marks)

c) Calculate the net present value (NPV) of the project assuming end of year cash flows. (4 marks)

d) Calculate the internal rate of return of the project. (4 marks)

e) Calculate the profiability index value for the project. (3 marks)

f) Summarise your findings and recommendation in a brief report to management (maximum 300 words). (5 marks)